Legal scholars urge Federal Circuit to curb 'SAD' IP litigation tactics

A lucrative tactic by the IP plaintiff bar to force quick settlements in mass-defendant filings has provoked a high-power quartet of law professors to urge the U.S. Court of Appeals for the Federal Circuit to curb a practice they call abusive, legally flawed and harmful.

The ploy involves hiding targeted online merchants' names in a sealed "Schedule A" document separate from the complaint. Schedule A defendants -- one of the professors, Eric Goldman, coined the acronym SAD to describe them -- often don't know they are targets until they find their website operator has frozen their accounts pursuant to a sealed TRO obtained ex parte by the plaintiff.

Goldman, who runs the High Tech Law Institute at Santa Clara University School of Law, called out the practice in a 2023 article titled, "A SAD Scheme of Abusive Intellectual Property Litigation."

But because such cases usually settle fast, they have eluded appellate notice. 

"You can fight and win or you can write a check," said Goldman, who has sought to draw courts' attention to the scheme. "We are talking about an enormous amount of litigation that has been completely invisible to appellate courts."

Joel B. Rothman, a plaintiff's attorney from Boca Raton, Florida who files such cases, said he understands that concerns can be raised about his tactics, "but the Lanham Act permits use of the courts' powers to address these issues."

Using the SAD acronym isn't fair, he added. "It puts the spin on it that professor wants."

Goldman and three colleagues, in a friend-of-the-court brief filed Feb. 6 to the Federal Circuit produced by a Stanford Law School IP clinic, called the numbers staggering. They estimate that as the number of complaints exploded from 2020 to 2022, more than 2,000 Schedule A cases were filed against several hundred thousand defendants. By now, the numbers have likely at least doubled, Goldman said last week.

The case they chose to highlight for the Federal Circuit was a rare instance where a defendant fought back and prevailed. 

The defendant, AccEncyc, a small-time seller of closet hooks and other household products, faced a Schedule A lawsuit, along with 66 other defendants, brought by the owner of a design patent for a "tote hanger." The structure of the case, typical of the Schedule A model, stacked the cards against AccEncyc from the start, the professors wrote.

Instead of paying off the plaintiff, AccEncyc retained counsel and won its case -- but not before its online marketplace account and the $40,000 in it were frozen for nearly two months.

AccEncyc made only $500 from the hooks that allegedly infringed the plaintiff's patents. Now the plaintiff is appealing the outcome. Easlick LLC et al. v. AccEncyc US et al., 24-1538, 24-1826 (Fed. Circ., filed May 20, 2024).

The lawyers for the plaintiffs did not return a message seeking comment. AccEncyc's attorney described his client as an Amazon.com seller based in China who reached him via email and asked for representation at a Northern District of Illinois hearing three days off.

"They're a small operation, but they wanted to fight, and we won," said Timothy A. Duffy, a sole practitioner near Chicago. 

He said he began tracking similar cases and now handles several a week. "There's an enormous volume of them in the Northern District of Illinois," he said. "The plaintiffs get Amazon to tell them how much the defendants have in their accounts, and that guides their settlement demands. This isn't just sad, it's abusive."

The amicus brief -- by Goldman; Sarah Fackrell of Chicago-Kent College of Law; Elizabeth Rosenblatt of Case Western Reserve University Law School; and Saurabh Vishnubhakat of Cardozo School of Law -- argues for affirmance and describes how lawyers for trademark, copyright, and patent rightsholders file complaints against multiple online merchant defendants on vague allegations of infringement and harm.

"Plaintiffs in 'Schedule A' cases tell judges that they need to secretly seize the assets of hundreds of defendants all at once in order to defeat the machinations of nefarious foreign 'counterfeiters' -- even in cases where no counterfeiting (or even plain trademark infringement) is alleged," wrote Fackrell last year. 

They use the loaded word counterfeit for its shock value, Fackrell said, adding, "the direct equation of design patent infringement to counterfeiting is false and the appeal to fear is fallacious ... policymakers, judges, and other decisionmakers should not fall for this sham." 

Two Stanford Law School professors produced the brief for Goldman, Fackrell and colleagues. Phillip R. Malone and Nina K. Srejovic of the school's Juelsgaard Intellectual Property & Innovation Clinic said law students August Gebhard-Koenigstein and Isabella Yang worked on the draft. Malone acknowledged that there are legitimate problems with trademark infringement by foreign national sellers.

"But that's what we have a legal system for," Malone said. "This scheme is so massive and so sloppy and runs so roughshod over the rules of civil procedure that it produces nothing but incentives to settle."

Goldman said one of the few cases filed in California failed last year when a Northern District judge questioned both the jurisdiction and the joinder of the defendants. A maker of weather videos sued 20 YouTube uploaders who allegedly copied the videos to their own sites. Viral DRM LLC v. YouTube Uploaders Listed on Schedule A et al., 23-cv-05594 (N.D. Cal., filed Oct. 30, 2023).

U.S. District Judge Jacqueline Scott Corley of San Francisco said uploading videos to YouTube doesn't create jurisdiction in the Alphabet Inc. Subsidiary's home district. She also rejected arguments about joinder, concluding the defendants allegedly committed separate acts of copyright infringement.

"This is a good outcome," Goldman wrote, but he was frustrated by how long it took. The defects were apparent from the complaint, so the court should have called out those issues at the ex parte TRO hearing, he contended.

Rothman, the Florida lawyer who filed the case, said he has similar matters in progress in Florida, New York, and Illinois.

"We defend sellers against piracy and counterfeiting," he said in an interview. "Amazon and Ali Baba and the like create huge problems for IP owners."

Malone, at Stanford, noted that Northern District of California courts "have at least occasionally been more skeptical of SAD cases and asked more of the right questions early on."

Rothman has another California case before Corley that began with 2,000 Schedule A defendants and is currently down to 537 after various adverse court rulings. Betty's Best Inc. v. The Facebook Advertisers Listed on Schedule A, 23-cv-04716 (N.D. Cal., filed Sept. 13, 2023).

Corley has stayed the matter, and, Rothman wrote on Jan. 29, "plaintiff is considering whether to request dismissal."